A tax-exempt investment is a type of financial investment that is not subject to federal income tax. Common examples include certain municipal bonds, which are issued by state or local governments to fund public projects. The interest earned from these bonds is often exempt from federal taxes, making them attractive to investors seeking to minimize their tax liability. These investments can provide a steady income stream while preserving capital. However, it's important to consider that tax-exempt investments may offer lower returns compared to taxable options. Investors should evaluate their overall financial goals and tax situation before choosing tax-exempt investments.